Can You Finance a Business With a Hard Money Loan?

A hard money loan may be an option when traditional financing is not

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Hard money loans are non-conventional, alternative sources of small business financing. They are typically associated with real property financing and are easier to obtain than conventional loans. However, hard money loans are riskier than conventional loans.

A hard money loan can be used to finance your business, such as if your business has a bad credit rating and you need cash to buy or renovate a property. But before obtaining a hard money loan, you need to know how it works and the underlying risk it poses.

Key Takeaways

  • Yes, you can use a hard money loan to finance a business, but there are risks.
  • Your creditworthiness is not a primary factor for a hard money loan. Instead, hard money loans collateralize the subject property.
  • Compared to conventional loans, hard money loans have higher interest rates and shorter terms.
  • It is easier to qualify for hard money loans, but they pose more risk than conventional loans.

What Are Hard Money Loans?

Typically, hard money loans are associated with real estate investors who buy properties, quickly repair them, and put them back on the market, a practice known as “flipping.”

Obtaining a conventional loan relies heavily on the borrower’s creditworthiness. But hard money loans use the subject property as collateral, enabling the investor to get the money they need quickly and without the drawn-out approval process of a conventional loan. These types of loans pose a lower risk for the lender, but a higher risk for the borrower since their property serves as collateral.

Hard money loans have short repayment terms, sometimes as little as four months. Many lenders prefer the term to be short (such as less than 24 months) so they can get the money back quickly.

Note

While hard money loans are a popular funding option for house flipping projects, businesses also use them to fund construction projects and land purchases.

How To Qualify for a Hard Money Loan

Hard money loans are based on the value of the subject property, which serves as collateral, not your credit score. So if a property’s market value is $500,000, and you’re able to borrow up to 70% in the form of a hard money loan, the loan would be worth $350,000. This is the loan-to-value ratio (LTV)—a percentage of the property's value.

Hard money lenders often do not offer loans for all types of properties. For example, a lender may offer hard money loans for purchases of single-family homes, office buildings, and warehouses, but will not finance a home used as the borrower’s primary residence or ground-up construction.

Borrowers must also meet the lender’s down payment or equity requirements. For instance, a lender may require a 25% to 40% down payment for property purchases.

Loan-to-Value Ratio

Lenders calculate the LTV based on the loan amount and the property’s value. The higher the ratio, the more difficult it is to get a loan. A loan’s LTV is a measure of the lender’s risk. Loans with low LTVs pose a lower risk for the lender, and vice versa.

The LTV calculation is simple:

Loan amount / property’s appraised value = LTV

Let's say that Company ABC wants to buy a building for $100,000. They can put down $30,000 as a down payment but need to borrow the remaining $70,000. The LTV for the loan is 70%.

Interest Rates and Other Terms on Hard Money Loans

Typically, hard money loans have higher interest rates than conventional loans because hard money loans pose higher risk for the lender. For example, if the average rate for a 30-year fixed-rate mortgage is 4.98%, you may pay an interest rate of 6.95% or higher for a hard money loan. Some interest rates could be as high as 10% or 12%.

Repayment terms on a hard money loan are also less favorable than on conventional loans. Hard money loans are short-term loans, some with terms as short as four months, 12 months, or just typically less than 24 months. Such short terms can create high risk for the borrower.

Note

Hard money loans can require you to pay an origination fee, closing costs, and points. Oftentimes, hard money costs run higher than those of a conventional loan.

Hard Money Lenders

Hard money lenders are individuals or companies that fund investments. To be a hard money lender, they must be flexible and able to move quickly to take advantage of opportunities in the marketplace. They are not restricted to the rigid criteria of traditional business loans and traditional business sources.

A simple internet search can yield hundreds of hard money lenders. Before taking out a hard money loan, do your research to make sure you are dealing with a reputable lender. Call them, check with others who may have used the company in the past, and ask real estate developers or agents in your area for any opinions.

Note

Try starting your search for a hard money loan—or less risky options—by asking a trusted real estate agent or mortgage broker for recommendations.

Frequently Asked Questions (FAQs)

What is a hard money loan for real estate?

A hard money loan for real estate is a type of loan that is not based on your credit score. Instead, it’s based on the value of the property. The loan is collateralized by the subject property and its value is based on the loan-to-value ratio. Hard money loans for real estate are usually short-term loans with high interest rates that are used for flipping houses.

How do you pay back hard money loans?

Hard money loans require full repayment within a very short amount of time, usually 12 months or at least less than three years. They also have higher interest rates than conventional loans, which can make the monthly payments steep. This increases the risk for the borrower. For example, if you obtain a hard money loan to flip a house and cannot resell it before the end of the term, the lender can take the property.

Updated by
Michael Evans
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Michael Evans has written about insurance for over two decades. His work has been featured in Bankrate, Fox Business, International Living, and Yahoo! Finance, among others. In addition to finance writing, Michael is the author of "Escape to Colombia" and is an accomplished professional photographer.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Consumer Financial Protection Bureau. "I Was Told I’m Buying a Home That Was Flipped and That I Have To Get a Second Appraisal. How Does That Work?"

  2. Rehab Financial Group. "100% Premier."

  3. Peer Street. "Hard Money Lenders for New Jersey Real Estate."

  4. West Forest Capital. "Hard Money Lenders NJ."

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